Buying Insurance Using VIX Options

• stevenplace
• February 25th, 2009

Let’s say you’ve got a portfolio that is pretty delta positive (bullish) but you’d like to hedge against market risk. There’s a couple of ways to do that. You could buy puts on the stock or calls you own, or move into covered calls. But that would limit you’re overall gain in the name. You could also sell call spreads in the market using SPY, DIA, or IWM. But I also like this particular play:

Buy VIX Apr 45/55 Call Spread 2.35 or Better

This is a bullish bet on the VIX, which basically means that you expect to be seeing more fear and uncertainty in the markets. Now we’ve essentially been chopping around in price for the past couple months but we made a fresh leg down and could start seeing a resumption in the downward trend. So if you want to protect your portfolio, you could pick up a couple of this spread as a fear hedge.

Do note that if you haven’t traded VIX options you should do a little more research as they don’t behave like normal options. They’re cash settled and the months don’t necessarily track the VIX that you see on your chart. So caveat emptor, my friends.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: dia, iwm, spy, vix

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